Financial Literacy: The Fundamentals of Financial Planning

Jul 30, 2017 News

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Creating a personal financial plan
It sounds complicated, but it is not. If you want financial security, having a good plan is the only way to achieve it. Financial plans help you determine where you are going with your money. Planning is important to ensure a direction for your day-to-day actions.
In fact, it is never too early to begin planning. The earlier you begin planning for your financial future, the sooner you will reach your goals. Creating the plan takes some work and no amount of planning can guarantee the outcome you want. Nevertheless, planning is better than not planning. Not planning is what some people do, and it is why they fail to reach their goals.
In the past, financial advisers were required to assist in the preparation of the plans but because of the proliferation of online calculators, it is now possible for ordinary investors to develop their own financial plans. In fact, the more you know about financial planning, the more you will realize it is not difficult.
However, it must be understood that because of the nature of interest and compounding that can be associated with investing, starting early can have great benefits.
Therefore, the longer your investments have to grow, the greater their growth will be. For example, if you invest $5,000 today and receive a 6% annual compounding interest rate, your investment will grow to approximately $10,000 within 12 years. Within 24 years, the $5,000 investment would grow to $20,000 and within 36 years to $40,000.
As you can see, financial planning boils down to finding the answer to one simple question, “Will I have enough money to retire at 55 or at 60?”
Your financial planning roadmap
What does a financial plan look like? Actually, it is different for every person. It is a roadmap of alternatives and choices that you make about your finances which affect almost every aspect of your life. Financial planning starts with a determination of where you are going, simplifying the path and building in milestones, implementing the roadmap, setting your monthly goals, and monitoring and modifying the plan.
Depending on your situation and how much financial progress you have already made, some steps may be unnecessary.
1. Determine your current financial situation: The first and most important aspect to creating a financial plan is to develop a budget detailing where your money goes. Having a thorough understanding of your current financial situation will help you to formulate realistic and well-informed goals.
2. It can be helpful to determine your current worth. To calculate your net worth, you will need to total your current liabilities (current bills and outstanding debt) and subtract them from your total current assets (cash, and cash equivalents, personal property, stock and bonds). The job is to figure out where your money is going now. There are free charts available online to assist you with calculating your net worth.
3. Set your financial goals: When developing your goals (short-term, medium and long-term), be sure to differentiate between necessities and wants. Establish priorities and consider the net worth calculated above and how realistically your goals align with your current financial situation. Then ask yourself a simple question: “Where do I want to be 20 years down the road?” So be specific, for example: “I want to own a house with the mortgage half paid off and/or I want to have an investment portfolio of let us say $2,000,000.” Be realistic. Once your goals have been set, refer to your target dates and the duration of your goals’ costs to determine a monthly cost that will be associated with working toward your goal.
4. Identify alternative courses of action: At this point, you will have to devise strategies to help you bridge the gap from where you are today to where you would like to be. This step of the financial planning process involves identifying alternative courses of action that can lead you to your goals. These include continuing with the same course of action (amount saved each month is appropriate) or change the current situation (use certificate of deposit instead of regular saving account).
5. Create and implement your financial plan: After you have determined your current financial situation, developed your financial goals and identified alternative courses of action you must now create and implement your financial action plan. This requires choosing ways to achieve your goal. As you achieve your immediate or short-term goals, the goals next in priority will come into focus.
6. Review and revise the financial plan: According to the McGraw Hill Company, “Financial planning is a dynamic process that does not end when you take a particular action. You need to regularly assess your financial decisions. Changing personal, social, and economic factors may require assessments that are more frequent. Make priority adjustments that will bring your financial goals and activities in line with your current life situation.” Reviewing your financial plan can help you to gauge your progress toward meeting your goals. Finally, do not forget to refine your retirement strategy.
As you can surmise, personal financial planning is the process of managing your money to achieve personal economic satisfaction. In this regard, some thoughts must be given to your heirs. Make sure that you have a will, the right beneficiaries listed on your pension accounts and the right beneficiaries named on your life insurance.
Next week we will discuss teaching financial literacy to teens: budgeting. Thanks for all your comments and support. As usual, please send your comments or questions to deputygovernor@ bankofguyana.org.gy

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